Although many U.S investors think of opening their portfolios to more African market exposure as highly risky, the reality is that African markets have become the growth engines in an era of anemic economic growth in developed markets such as the U.S., Europe and Japan. Due to structural reforms, some of Africa’s economies have grown annually by at least 5% since the financial crisis of 2008. However, despite the attractiveness of African economic reforms and fascinating growth rates, they are somehow misunderstood and many investors hesitate to include African market asset classes such as equities and bonds in their portfolios.
There are a lot of misconceptions about investing in Africa. Some are outdated. Similar to how today’s phones no longer have rotary dials, African economies have evolved from what they were years ago. Let’s look at two common myths and truths about investing in Africa:
Myth 1: Commodities are the main driver of African economic growth.
The Truth: Based on projections by the International Monetary Fund, some of Africa’s fastest growing economies, such as Rwanda (7.5% in 2013 and 2014), Ethiopia ( 7.0% in 2013, 7.5% in 2014), Burkina Faso (6.5% in 2013, 6.4% in 2014), Mozambique(7.0% in 2013, 8.5% in 2014), Tanzania(7.0% in 2013, 7.2% in 2014) and Uganda(5.6% in 2013, 6.5% in 2014) are driven by structural reforms and investments in agribusiness, tourism, air travel, aluminum, and electricity production.
Myth 2: Investing in the economies of African countries involves risks not typically associated with investments in securities of issuers in more developed economies.
The Truth: African economies are smaller and market statistics are harder to come by. However, some small African economies have a better overall business environment than some large emerging markets. Take Rwanda for example. According to the World Bank’s “Doing Business 2014,” Rwanda is ranked 32nd while Russia is ranked at the 92nd spot in the overall ease of doing business.
African economies have evolved thanks to sound reforms that have led to stellar growth. This offers opportunities for investors who are seeking income to consider. To determine if an African asset class is right for you, talk to a financial professional who can understand your goals, preferences, risk tolerance and time frame to help you diversify and achieve your financial goals.